Aug 29, 2018 / News

Business Consulting / Taxation

Keep your wits about you: lowering of company tax rates and imputation

Recently, a Bill passed the Senate that changes the way company profits are taxed (and dividends are franked) from 1 July 2017 onwards.

The new methodology for determining the way company profits will be taxed is set out below.

• For 2018, companies with a turnover of less than $25 million and deriving 80% or less of total income from passive activities will be subject to company tax at a rate of 27.5% (i.e. company tax will only be 30% if turnover is $25 million or more or if the company derives more than 80% of total income from passive activities in 2018); and
• For 2019, companies with a turnover of less than $50 million and deriving 80% or less of total income from passive activities will be subject to company tax at a rate of 27.5% (i.e. company tax will only be 30% if turnover is $50 million or more or if the company derives more than 80% of total income from passive activities in 2019).

From 2018 onwards, the rate at which dividends can be franked will depend on the company’s turnover of the previous year as well as whether the majority of the company’s income was passive in the previous year:

• 2018 dividend will be franked at 27.5% if the company’s turnover for 2017 was less than the 2018 benchmark ($25 million for 2018) and the company derived 80% or less of total income from passive activities in 2017 (or if the company did not exist in 2017);
• A 2018 dividend will be franked at 30% if the company’s total turnover for 2017 was equal to or more than the 2018 benchmark ($25 million for 2018) or the company derived more than 80% of total income from passive activities in 2017.

The rate at which 2019 dividends will be franked will also be determined by applying the same methodology as mentioned above (i.e. compare the company’s turnover in 2018 to the 2019 benchmark of $50 million and determine the amount of passive income of the company in 2018).

Because company profits may be taxed at different rates from the rate at which these dividends are franked, the disparate tax treatment can lead to either:

• Over-franking of dividends (i.e. if company profits are taxed at 27.5% but franking is done at a rate of 30%) – in which case certain actions need to be undertaken to avoid the imposition of franking deficit tax; or
• Under-franking of dividends (i.e. if company profits are taxed at 30% but franking is done at only 27.5%) – in which case franking credits may become trapped and may not be usable.

These changes are extremely complex, and therefore we would recommend that you speak to your Nexia adviser for assistance if you are operating in a corporate structure.

We can assist you to work out at which rate company profits should be taxed or dividends be franked as well as advise what to do if company profits or dividends were taxed or franked at wrong rates in previous years.

How can Nexia Edwards Marshall help you?

For any questions or to discuss any of the above in relation to your personal situation, please contact Grantley Stevens or your Nexia Edwards Marshall Adviser.

The material contained in this publication is for general information purposes only and does not constitute professional advice or recommendation from Nexia Edwards Marshall. Regarding any situation or circumstance, specific professional advice should be sought on any particular matter by contacting your Nexia Edwards Marshall Adviser.